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FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management

A financial intermediary's role in risk transformation is best illustrated by which of the following activities?

A bank pooling many small deposits to fund a diversified portfolio of loans illustrates risk transformation. The intermediary spreads credit exposure across many borrowers and offers depositors a liquid, lower-risk claim than any single loan would provide.

  1. AA bank pools many small deposits and makes large loans, diversifying credit exposure across many borrowers on behalf of depositorsCorrect
  2. BA corporation holds all its excess cash in a single overnight account
  3. CA regulator publishes capital rules for banks
  4. DAn investor buys a single stock on margin

Explanation

Intermediaries transform risk by pooling funds and diversifying exposures, giving savers a claim that is safer and more liquid than the underlying loans. The other options describe holding cash, regulation, or leveraged investing, which are not intermediation functions.

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